This week we dive into options, futures, margin trading and more complex trading vehicles.
Be a Smarter, Safer Investor in 8 Weeks
Was this newsletter forwarded to you? Sign up here.
Until I made my way into the world of finance for work, my main understanding of any derivative financial product came from the 1983 movie “Trading Places,” which ends with a frantic scene involving Eddie Murphy, Dan Akroyd and orange juice futures.
I tell you this not to encourage learning finance from movies – though “The Big Short” does do an amazing job of being both educational and entertaining – but to let you know that it’s not impossible to master the world of options, futures and margin trading at any point in your investing journey.
In both traditional finance and crypto, one of the main reasons people use derivatives is simple: leverage. Options and futures contracts allow you to buy more cryptocurrency with less upfront capital. You’re not actually buying or selling, say, bitcoin, but contracts *about* bitcoin.
In the case of options, you buy a contract that gives you the option, but not the obligation, to buy bitcoin at a certain price on a certain date. Futures contracts, on the other hand, say you will agree to buy bitcoin (or orange juice) at a set price at a set point in the future, no matter the actual market price.
The other reasons are to hedge and manage risk in your portfolio and in the case of crypto, because instruments like bitcoin futures have regulatory oversight and can be traded in many traditional brokerage accounts. We dive in deeper into the reasons here:
If you read the “why trade derivatives” piece and said “count me in!” then there’s still a bit more work you’re going to need to do before you start buying these contracts. While there can be a huge upside to making these bets, there can be an equally terrible downside.
Understanding the level of risk and what you may owe when the bill comes due is why most traditional broker-dealers require people to be approved before trading options or futures. In “Trading Places” (spoiler alert) futures are used to basically destroy an entire company, making the heroes rich and the villains bankrupt in a single trading session.
Crypto is already a highly volatile and speculative asset class, and layering in more complex products and strategies adds in new risks. To add to that, there’s a kind of futures contract in crypto that doesn’t have a set end date called a perpetual swap. So even if you’ve dabbled in traditional futures before, it’s important to understand the mechanics that allow a futures contract to go on in perpetuity and the perpetual risks that it exposes you to.
We’ve been diving into some of the more difficult investing concepts, so for this week’s safety article we’re going to take a step back and look broadly at social media scams that are so prevalent in crypto.
Personally, I am targeted daily by some sort of crypto scam on Twitter. It’s a problem I’m not sure is going to be helped by Elon Musk’s recent acquisition of the platform because one big scam involves impersonating verified accounts of notable people in crypto.
Crypto Twitter is something that many traders find important when seeking alpha, so it’s equally important to be able to sort the bots and scammers from real people. Read on to learn more:
For our final week we’ll focus on how to stay sane in the 24/7, volatile world of crypto investing. Until then, as always, I welcome feedback and questions at learn@coindesk.com!
Don’t miss out on this powerful and entertaining weekly podcast that celebrates women supporting women, investing in women and bridging the gender gap in wealth through Web3. Each week brings a new and exciting guest sharing insights on topics like starting an NFT project, creating belonging and inclusivity in digital spaces, building prosperous Web3 projects, investing in cryptocurrencies and building wealth. Listen now!
Disclaimer: The information contained in this newsletter, and any information linked through the items contained herein, is not intended to provide sufficient information to form the basis for an investment decision. You should seek additional information regarding the merits and risks of investing in any cryptocurrency or digital assets.
Would you like to receive some of CoinDesk’s other newsletters?
